Tuesday, September 28, 2010

The flat tax is the moderate position

I've had a passing thought lately about the flat tax - the idea that all taxpayers should pay the same percentage of their income. It has been explained well here and here. The flat tax is often cast as an extreme position, but I argue it's really the moderate position on taxation.

America instead uses a progressive tax, where people with higher incomes pay a higher percentage and people with very low incomes pay none at all. For example, the Tax Foundation reported last year that America's top one percent of tax returns made 22.8 percent of the adjusted gross income and paid 40.4 percent of federal personal income taxes.

Now consider this: In that same year under a flat tax the top one percent would have paid about 22.8 percent of federal income. The rich would also lose access to tax shelters and loopholes that help them pay less.

If the progressive tax is one side of the spectrum, than the opposite would be a regressive tax where the rich pay a lower percentage of their income than the poor. Even worse would be a tax completely equal in dollar amount regardless of income or exemptions, such as a tax that each person is required to pay $12,000 in federal taxes each year.

No one actually advocates for a regressive or equal tax, so the middle position - the flat tax, is falsely seen as a being an extreme position when in fact it rests flatly in the middle.

I think a regressive income tax would be entirely sinister. This isn't even a post advocating a flat tax (although I did link two videos promoting it and zero opposing it)

But we do have a form of regressive taxes and penalties. Speeding tickets do not take into account ones income, and are entirely "equal" and therefor regressive. A flat speeding ticket would be a fixed percentage of someones income, and a progressive speeding ticket would scale up when someone makes more.

I'm not sure if the Swiss $290,000 speeding ticket to a rich man doing the equvilent of 85 mph in a 50 mph zone was flat or progressive, but boy oh boy it was not regressive!